Interesting times indeed in Bay Area real estate. There has been a lot of media attention on the region due to the IPOs slated to take place this year. I wanted to spotlight a few things in this newsletter.
While a lot has happened in the last month, the major headline is that 30-year mortgage rates continue to plummet. In the last week of March, they had their biggest weekly drop in a decade. This creates a huge affordability window for homebuyers and homeowners.
Freddie Mac reported that the 30-year fixed-rate mortgage averaged 4.06% in the last week – a massive drop of 22 basis points from the previous week’s rate of 4.28%.
30-year fixed mortgage rates are now hovering closer to the same level as the summer of 2017 at 3.8%. During that time the housing market was hot. Low rates were helping home buyers finance more expensive houses, and sellers were able to ask higher prices. This is a big change from the end of 2018. Rates went up as high as 5% last November.
30-year fixed mortgage rates are now hovering closer to the same level as the summer of 2017 at 3.8%.
First, let’s explore why rates fell. The reason is because the Federal Reserve cut its growth forecast for the economy and signaled that it would not do any more of its own rate hikes in 2019. Looking ahead through 2021, I think rates will continue to stay low until at least 2020 when the Fed plans to raise its interest rate by a quarter of a point.
This means the Fed sees things slowing down in some areas of the country and in some sectors of the economy. For that, however, the Fed must be looking in markets other than San Francisco; San Francisco has one of the most vibrant economies in the US. Even though last month’s unemployment figures did tick up slightly, we still have one of the lowest unemployment rates nationwide.
The Fed considers an unemployment rate of between 5.2% to 6% to be the long term stable rate. Areas that have unemployment rates below this should see increasing wage growth. San Francisco’s unemployment rate is 2.6%. The combination of a strong local economy and lower mortgage rates is going to create a robust housing market throughout 2019.
Let’s take a look at home price movements through March of this year. San Francisco is prone to price movements that are wider than other areas in the US. On the Median Sale Price chart below you can see the sharp decline in price from January of 2018 through January of 2019. That reversed in February when prices ticked up. This data corresponds with interest rates. Single family homes appreciated 11% month-to-month and 20% over the last 60 days. Condos increased 8% month-to-month and almost 25% over the last 60 days. That is tremendous price growth. Year-over-year, prices are now in the black, and once again, they are near historical highs.
Looking at this past month, let’s take a look at Active Listings, which tells us how much outstanding housing inventory is on the market. Normally active listings bottom out in December and then rise steadily through the spring months. In March, however, active listings fell from its February inventory level. This is another signal that housing inventory is tightening. The data suggests that homebuyers waiting to purchase a home took advantage of the low rates and took some of the inventory off the market.
To conclude with our discussion on interest rates, lower rates mean homebuyers can stretch their money further. However, it also means that the market is heating up again, and homes are selling faster. Buyers will need to act quickly.
Rounding out March, let’s discuss the other big event from last month: Lyft’s IPO.Lyft went public in the end of March. The stock jumped 12% during the first day of trading and then pulled back during the most recent trading days. Its stock price is down to around $60 but is stable enough at the moment to be a good indicator that the other tech companies expected to IPO this year will do well. This includes Uber, AirBnB, Pinterest, and Slack. Another indicator that it will be another heavy IPO year is that the S&P 500 is strong and nearing its 2018 highs. When the overall market is doing well, it encourages private companies to list.
These IPO’s will put even more upward pressure on local home prices because the IPOs create a huge influx of cash. These companies and many of their employees are located in the Bay Area. Look for their stock options to vest within six months to a year after their company’s IPO.
Homebuyers who live in areas with a higher concentration of tech employees from companies planning to IPO this year may want to consider beating the rush. Facebook’s IPO in 2012 raised home values by 25% in some neighborhoods located within Menlo Park and Palo Alto. While the impact on San Francisco was smaller, it still created an uptick in housing prices throughout 2012 and 2013. The IPOs will create approximately 5,000-10,000 new millionaires in the Bay Area. This influx of liquid wealth will affect the luxury housing and condo markets with high-end condos expected to be most affected.
The takeaways for April.
In January, pundits were writing about a rough 2019 ahead in the housing market, but this was before the Fed drastically revised its rate outlook through 2021. Now, things look set to continue to trend upward.The takeaways for homebuyers: Rates are low again. If you put off buying while rates were near 5% last year, it’s time to reconsider. Of course, the flip side to cheaper financing is that the market will be hot, home prices will be up, and houses will go quickly.The takeaways for home sellers: Rates are low enough for some homeowners to take advantage of refinancing if they did not do so in previous years. It is also a great time to list. In this market, many sellers will receive offers that meet or exceed their expectations. Cheaper rates mean that buyers can stretch their income out more and are willing to take a look at a more expensive home.Although active listings are down, houses sold are ticking up. The season of buying and selling is upon us. In this environment, everyone wins.